REITs gaining ground in Indian real estate

Vijay C Roy

American President Franklin D Roosevelt once said, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”

It is no secret that when it comes to investment, Indians have a soft spot for real estate. Investors feel that once acquired, price appreciation of real estate is bound to take place. However, the zooming real estate prices across the country be it in Tier-I, Tier-II, Tier-III or Tier-IV cities, or even in semi-urban areas have made it difficult for small prospective retail buyers to enter this segment.

But what if you can invest in commercial real estate without purchasing the property by just buying a share as low as Rs 100-Rs 400 per unit? This is where the Real Estate Investment Trust (REIT) comes in. An REIT allows investment in commercial real estate, which is not otherwise easily accessible to small retail investors.

What are REITs

Seema Goyal, a Chandigarh-based insurance professional, had long thought of investing in REITs. “I couldn’t initially invest when REITs were introduced in India in 2019 as the ticket size was large. One can now invest anywhere between Rs 100 and Rs 400 per unit. I recently invested in a REIT and am confident that it will give me good returns.” Seema is among the 1.2 lakh retail investors who have put their money in REITs.

Just as mutual funds invest individual money into securities like equity, debt and money market instruments, REITs invest in real estate and are listed on the stock exchange. These allow an investor’s exposure to real estate without having to purchase or manage properties by themselves.

Simply put, when an investor buys a unit of REIT, it represents partial ownership of that real estate asset held by the trust, thus entitling the unitholder to a share of the income generated by the REIT.

REITs own and operate real estates to generate income. For instance, they lease properties and collect rent. The rent collected is later distributed among the shareholders or unit holders on a quarterly basis.

REITs in India

The concept of REITs originated in the US in 1960 to provide investors with an opportunity to invest in and profit from diversified, large-scale, professionally managed portfolios of US real estate. Subsequently, Australia, Malaysia, South Korea, Japan, Singapore, Hong Kong, Thailand, Germany and the UK made an entry.

In India, REIT is a relatively new concept. The Securities and Exchange Board of India (SEBI) introduced its draft REIT regulations in 2007. After considerable modifications, the Real Estate Investment Trusts Regulations, 2014 (REIT Regulations), were enacted in India on September 26, 2014. Embassy Office Parks was listed in April 2019. This was followed by the listing of Mindspace Business Parks REIT in August 2020, Brookfield India Real Estate REIT in early 2021 and Nexus Select Trust REIT in 2023. Many leading names in the real estate sector are expected to introduce REITs soon.

Current participation by individuals

There are around 1.2 lakh individual investors across the country in REITs. Initially, the minimum investment in REITs was Rs 2 lakh for IPO subscription and Rs 1 lakh in the secondary market, which acted as a stumbling block for individual investors. Then, in April 2019, SEBI changed it to Rs 50,000. Finally, they made it 1:1 or one can buy one share depending upon the value in August 2021.

How returns are generated

Investors get quarterly payouts by REITs from the net rental income received through renting out and leasing commercial real estate after deduction of some key expenses. The SEBI mandates that at least 90 per cent of net rental income received by REITs must be paid to investors.

“REITs provide retail investors exposure to Grade A commercial real estate in a liquid, transparent and highly regulated form in two powerful ways. First, REITs are mandated to pay out at least 90 per cent of net distributable cash flows to their unit holders. Second, investors get capital appreciation as well since REITs are effectively high-dividend stocks with a strong growth potential through vacant space lease-up, rental escalations and rental reversions at or above market rents,” says Ritwik Bhattacharjee, chief investment officer, Embassy REIT.

Since REITs are listed and traded on stock exchanges, the price of an individual unit changes depending upon their performance and market demand.

Performance of REITs

The four REITs collectively comprise about Rs 73,000 crore of equity market capitalisation and encompass 105 million square feet of commercial space, spanning the Indian office and retail sectors. Recently, the asset class achieved a significant milestone, with distributions by Indian REITs crossing Rs 12,000 crore since 2019. This surpasses the combined dividends distributed by real estate companies that form the entire Nifty Realty Index, according to Embassy Office Parks officials.

Realistic expectations

There is not much interest in REITs from retail investors because of low awareness. The subdued buzz is also attributed to the perception that there is better interest to be earned in other instruments. The current rate of returns is in the range of 7-10 per cent, besides capital gains. “We have not invested in REIT till now, but we wish to have our own REIT in the near future. Since there are only four REITs, we have limited options,” says Prateek Mittal, executive director, Sushma Group.

Who can invest

Any investor, be it domestic, FPIs (foreign portfolio investors), retail or institutional, can buy REIT units. There is no minimum trading lot size. The investor can invest in a single unit of REIT and can purchase units through a demat account, similar to how one would purchase shares in a listed company. Indian REIT units can be bought or sold freely on NSE or BSE, either online or through a broker. Investors can also buy REIT units through participation in IPO and through open market.

Risks and Tax implications

Commercial properties are not insulated from economic problems like recession. If the economy goes south, it can adversely impact REITs. Secondly, the rise in loan interest rates also hampers the returns. Another stumbling block is that the interest obtained from REITs is taxable. Also, capital gains from the sale of REIT units are covered by Short Term Capital Gains and Long Term Capital Gains, as applicable to equity investments.

How to invest

REITs are listed and traded on stock markets, and purchasing units on the stock market is the best way to invest. A demat account is mandatory. Just like stocks, the price of REIT units changes depending on both the demand for units as well as the performance of the REIT. You can also invest in REITs through mutual funds. A few domestic mutual funds have also started investing in REITs.

Limitations

There are only four REITs in India, which significantly limits the choice for investors. Any interest earned is completely taxable. REITs are also affected by changes in interest rates.